The article is a transcript of the O'Reilly Automotive, Inc. Second Quarter 2024 Earnings Call. The operator, Holly, introduces the call and the participants are reminded that the comments may contain forward-looking statements. The company's actual results may differ from these statements due to various factors. Brad Beckham, Brent Kirby, Jeremy Fletcher, Greg Henslee, and David O'Reilly are all present on the call.

The speaker thanks their team for their hard work during a challenging second quarter. Despite sales falling short of expectations, the team was able to outperform the industry and generate increased operating profit and EPS. The full-year outlook has been revised and the company expects a 7% increase in EPS. The speaker credits the team's strong execution for this growth.

In the second quarter, the company faced challenges in April and May due to weather conditions, but saw improved trends in June driven by hot weather-related categories. July sales have remained solid, but have moderated compared to last year. The professional business had strong sales growth, driven by both average ticket values and ticket counts. The company attributes this growth to their customer service and inventory availability. However, DIY sales were down slightly due to lower ticket counts.

The company experienced modest inflation and strong sales in hot weather and maintenance categories, but saw softer sales in discretionary and undercar hard part categories. They believe this may be due to consumer pressure and remain cautious about the current market environment, but have confidence in the long-term demand for their industry due to strong employment and wage rates.

The company believes that consumers are being more conservative with their spending due to higher prices and economic uncertainty. They have adjusted their full-year sales expectations and lowered their guidance. However, the company remains confident in the long-term demand for the automotive aftermarket, citing factors such as the growing car park and the importance of transportation needs. They also believe that their business philosophy will remain unchanged despite the current economic conditions.

In the sixth paragraph of the article, the speaker discusses the company's "run it like you own it" philosophy and how it does not accept external pressures as an excuse for not gaining market share. They mention that even though they have gained market share in the first half of 2024, their teams are not satisfied and are committed to working hard every day to achieve better results. The speaker then thanks the company's team for their dedication and turns the call over to Brent, who discusses the company's second quarter gross margin results. They mention that the gross margin was down compared to the previous year, with the acquisition of their Canadian business being a major factor. They expect this acquisition to have a slightly higher negative impact on gross margin for the remainder of 2024.

The company's outlook for the impact of an acquired business remains unchanged, with a 15 basis point headwind to operating profit expected in 2024. Gross margin results in the second quarter were below expectations due to a product mix margin headwind, pressure on distribution costs, and a larger-than-anticipated headwind from the mix of DIY and professional business. However, the company remains confident in the stability of acquisition costs and selling prices and expects to improve gross margins through its premium value proposition. SG&A expenses were managed prudently in light of softer sales. Overall, the company is maintaining its full-year gross margin guidance range.

In the second quarter, our SG&A grew by 2.8% per store, with 10 basis points attributed to Canada's operating results. Despite pressure on comparable store sales, we remain committed to maintaining high levels of customer service and will not make drastic adjustments to our SG&A spend. Our district managers, with an average of 14 years of service, are actively engaged in enhancing customer service and optimizing store productivity. Our experienced leadership team is essential to our success in providing consistent customer service regardless of market conditions.

The company is committed to working harder to earn business in a challenging environment and is focused on developing strong long-term relationships. They are aware of potential sales volatility and will manage expenses accordingly. They have updated their guidance for SG&A and operating margin, and are pleased with their inventory and store in-stock position. They are maintaining their target for inventory growth and will continue to adjust as needed.

In the second half of 2024, the company plans to add inventory to their stores, hubs, and distribution centers to ensure availability. They have opened 27 new stores in the second quarter and plan to open 190-200 more by the end of the year. They have also opened 7 new stores in Mexico and plan to open 15-20 more. The company is excited about their growth in Mexico and Canada. They have spent $475 million on capital expenditures in the first half of the year and will continue to invest in new store and distribution expansion projects. The company's success is dependent on providing excellent customer service and they are confident in their team's ability to maintain this standard. Jeremy will now provide more details on the second quarter results and outlook for the rest of the year.

In the second quarter of 2024, sales increased by $203 million, mainly due to a 2.3% increase in comparable store sales and contributions from new stores. The effective tax rate for the quarter was 23.3%, slightly higher than the same period in 2023. The company expects a full-year effective tax rate of 22.4%. Free cash flow for the first half of 2024 was consistent with the previous year, and the company maintains its guidance for the full year. The company's accounts payable as a percentage of inventory decreased slightly, and it is expected to continue to decrease in the second half of the year. The company also expects to finish the year with a lower debt ratio.

The company had a decrease in their debt-to-EBITDAR ratio in the second quarter and remains below their leverage target. They are pleased with their share repurchase program and have repurchased a significant number of shares. The company's EPS guidance includes the impact of shares repurchased through this call. The Head of Investor Relations, Mark Merz, will be transitioning into a new role in the company's Mexican operation after 15 years in his current position.

The company is expanding its business in Mexico and has appointed a new senior leader, Mark, to work with the growing leadership team there. The transition will take place at the end of the third quarter and Mark will continue to serve in his current role until then. The primary Investor Relations contact function will be handed off to Leslie, who has nine years of experience with the company and currently heads the tax function. Eric Bird will also continue to be a point of contact for investors. The company is experiencing softness in discretionary goods and will provide more information on the percentage of mix and sales decline during the question-and-answer session.

The speaker addresses two questions, one about the impact of discretionary categories on the company's overall chain and the other about the expected dilution of gross margins in Canada. The speaker explains that the discretionary categories were down more significantly than the rest of the chain, but they are still a minor part of the business. The speaker also mentions that the dilution of gross margins in Canada is expected to be slightly higher than originally anticipated, but this was already factored into their guidance range. They also mention other factors that may impact gross margins, but these are viewed as temporary and not expected to cause significant pressure.

The company remains optimistic about its performance in the second half of the year, as it expects to benefit from its strong partnerships with suppliers. While July may not have been as strong as June, the company still feels confident in its overall outlook and is focused on meeting its adjusted guidance for the rest of the year. However, there are still several weeks left in July and the company is cautious about making any definitive statements about its performance.

The speaker discusses the start of the quarter and mentions that it's difficult to determine the impact of the 4th of July holiday on the business. They also mention that the timing of weather benefits is different from previous years, making it challenging to draw conclusions. They feel confident about the business overall, but there have been fluctuations in certain undercar parts. They believe they are gaining share in this area, but there may be some deferral of larger purchases or trade-down happening.

The company is looking at data from a share perspective and specifically at undercar and underhood hard part categories. They are going up against tough comparisons and believe there is some deferral in high ticket service items. They are not seeing trade down in their product lines, but rather a migration to best and out of good and better categories. This could be due to higher-end batteries and AGM requirements, as well as the success of their proprietary brands.

The speaker discusses the impact of the COVID-19 pandemic on consumer behavior in the automotive aftermarket industry. They mention a decrease in sales for discretionary categories like windshield wipers, as people opt for cheaper options. However, the company still maintains a strong market share. The speaker also mentions that they do not anticipate any further price or expense investments in order to maintain their market share.

The company has made successful investments in their business, including competitive pricing and excellent customer service. They believe these investments have paid off and are not currently looking to make any further price investments. They continue to invest in staffing and initiatives to improve the experience for their team members and customers.

The speaker states that they will continue to invest in strategic initiatives, but does not believe another round of price initiative is necessary. They are not relying on external factors for growth and are confident in their ability to control their own destiny. They believe they are still taking market share and are focused on providing better service.

The speaker reflects on the tough years in their 28-year career with O'Reilly and how they have used those challenges to build their own catalyst for success. They mention competitors who overreact to tough times, leading to opportunities for O'Reilly. The speaker believes that the biggest catalyst for their success is their own self-criticism and commitment to improving execution. Another speaker adds that the industry has seen similar cycles before and they have confidence in their ability to support economically constrained consumers. They do not provide a long-term outlook or guidance for 2025.

The speaker discusses the company's approach to managing business operations during times of softness, emphasizing the importance of balancing short-term adjustments with long-term investments. They also mention that there have been no changes to their store opening plans in the US, Mexico, or Canada and that they feel confident about their pace of growth in those regions.

The company remains confident in their store growth and is investing in distribution infrastructure to support it. They have a solid amount of flexibility in managing staffing levels and believe any potential headwinds from a higher full-time mix will be offset by productivity and turnover.

The company has invested in finding the right balance between full-time and part-time employees, as well as in compensating and managing their teams. This has resulted in a high-quality store team with experienced leaders who can effectively manage the business. While the industry may experience some sales softness, the company will not sacrifice their high level of service. They feel confident in their leadership team's ability to manage costs and retain employees. The company also emphasizes the importance of having professional and knowledgeable staff at the counter.

The speaker discusses the impact of weather on the company's growth in the second quarter, stating that it was likely a net positive due to hot weather leading to an increase in failures. They also mention that weather has influenced the industry's performance in the first half of the year and has been a contributing factor to the overall choppiness.

The speaker reiterates that the effects of certain factors on the business will even out over time. They expect the second half of the year to be more neutral, with some ups and downs. The composition of the business has been consistent between DIY and professional customers. The second quarter may have benefited from lower product acquisition costs, but this is expected to even out in the back half of the year as suppliers face different pressures.

The speaker discusses the company's acquisition costs and how they have been affected by the current economic environment. They expect the back half of the year to be more normal, with no significant deflation. The speaker also mentions that there was a net benefit in the second quarter and they expect to add to that in the back half of the year. The following question asks about the strength of the business in June and if the moderation of guidance reflects only the weaker first half of the year or also the second half. The speaker responds that the guidance reflects both, as they expect the business to continue to strengthen in the second half of the year.

The company's back half will be similar to the first half, and their outlook for the remainder of the year is based on their current results and business performance. The second quarter was in line with expectations and there was no significant outperformance. The company thanks their team for their hard work and dedication and looks forward to reporting third quarter results in October.

This summary was generated with AI and may contain some inaccuracies.